Farmer-Owned Ethanol Plants Contribute More To Local Economies

Oct 18, 2006

Local ethanol plant ownership generates significantly more economic activity for the communities in which the plants are located than plants owned by absentee investors, according to a study released by the National Corn Growers Association (NCGA).

The study, "Economic Impacts on the Farm Community of Cooperative Ownership of Ethanol Production," concludes that, "Since a farmer-owned cooperative ethanol plant is literally a member of the community, the full contribution to the local economy is likely to be as much as 56% larger than the impact of an absentee-owned corporate plant." John Urbanchuk of LECG, LLC, conducted the analysis.

In many ways the economic impact of farmer-owned and absentee-owned ethanol plants on the local community is similar, the study points out. Yet there are two important differences that significantly increase the impact of a farmer-owned plant:

1) The share of expenditures for operations of a farmer-owned plant derived in the local community is likely to be larger than that of an absentee-owned plant. For example, virtually all accounting, administrative and marketing functions will be provided locally, while these functions may be centralized off site for an absentee-owned plant.

2) Farmer-owners of a cooperative or limited liability corporation (LLC) ethanol plant will participate in the profits through dividends. Dividends paid to farmer-owners represent additional income that is spent and invested largely in the local community, according to the study.

The economic impact is directly linked to plant size and depends on the relationship between the ethanol plant and the local economy, specifically whether the plant is locally owned. The analysis compared a 50-million-gallon/year, farmer-owned dry mill ethanol plant with a similar-sized, absentee-owned plant. Most absentee-owned facilities are owned by centralized agribusiness corporations.

"By putting money directly into the pockets of local residents, farmer-owned ethanol plants have spurred economic growth in rural communities across the country," says Bruce Noel, chairman of the NCGA Ethanol Committee. "When farmers and other local investors are given the opportunity to participate in the ownership of ethanol plants, the economic benefits to the community are magnified enormously."

Nearly half of all ethanol plants are owned and operated by farmer cooperatives or LLCs and account for 38% of total ethanol production. However, during the last two years there has been a substantial influx of non-farmer capital into the ethanol market. According to the Renewable Fuels Association, only two of the 43 ethanol plants under construction are majority farmer owned.

"It's unfortunate that there currently aren't more opportunities for farmers and other locals to invest in the plants being constructed in their communities," Noel says. "With locally owned plants, the profits stay in the community and that discretionary income is what truly facilitates rural development."

Though its members favor the local ownership model, NCGA recognizes many ethanol ownership models are necessary for the continued growth and success of the domestic biofuels industry.

"We are not opposed in any way to the continued development of absentee-owned ethanol plants; we understand the ethanol industry needs a variety of business models and equity sources to succeed," Noel says. "However, for the sake of the community, if an ethanol project's developers have the opportunity to allow local investors to participate, we certainly would encourage them to consider doing so.

"Any ethanol plant – regardless of who owns it – is good for corn farmers and good for the U.S. economy," Noel adds. "But if you're talking about the effects on the local economy and farm income, ownership matters. Those plants that are farmer owned undoubtedly have a more pronounced impact on the local economy."